Alternative Billing:
Fad, Fancy, or the Future of Law?

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Legal futurists like Richard Susskind and Mitch Kowalski have long predicted that value-based billing is the wave of the future for the legal profession–in part because corporate clients are beginning to demand it. In a recent interview, Mitch explains his theory:

Corporate clients are finally waking up to the arbitrary way in which they are charged and are demanding that legal fees bear a clear relationship to the client’s perception of the value received. How long the lawyer takes to provide that value is irrelevant.

Of course, just because clients prefer it doesn’t mean it’s necessarily the right solution–or even a workable solution. After all, lawyers have been billing by the hour for decades now and there must be a good reason for it, right? Perhaps hourly billing simply works better for lawyers, making their lives easier and improving client service in the process.

Or maybe, just maybe, lawyers can’t see the forest for the trees and are clinging to the old ways of doing business even though it literally makes them ill.

Unfortunately, according to a recent study, it seems that the latter explanation is the correct one. Rather than simplifying lawyers’ lives or aiding client representation, billing by the hour actually makes lawyers depressed and anxious, as explained by Vivia Chen at the Careerist blog:

(Lawyers who billed hourly) suffered from higher stress during downtime, and they worried more about having enough work. When work was available, they were tempted to work as much as possible. A vacation or a day off meant a loss of money. Other studies found that the problem got worse as people made more money, because they felt that their time was more valuable and therefore more scarce.

So, if it’s bad for our health and many clients increasingly seem to prefer the predictability of value-based billing, then consumer demand and common sense will no doubt result in change. Because change is good.

But then again, we’re talking about the legal profession–a profession that is willing to change, but does so at its own pace. And, when it comes to alternative billing arrangements, a new ALM report shows that lawyers are not exactly embracing value-based billing practices. Earlier this month, the Wall Street Journal Law Blog reported on the results of the study:

The ALM report surveyed 141 in-house law departments and 194 law firms on their use of—and satisfaction with—alternative billing arrangements.

It found that most law firms continue to rely on traditional billing for the majority of their work, and law firms are on whole less delighted with alternative fees than the corporate law departments they serve.

So alternative billing isn’t exactly catching on in the legal field. And quite frankly, the profession’s reluctance as a whole to embrace this concept makes perfect sense to me even though my resistance to value-based billing for certain types of cases makes little, if any, sense.

By way of explanation, I have a background in criminal defense and civil litigation. I’ve always charged flat fees for criminal defense files, while civil cases were billed either hourly or on a contingency fee basis. And, for some reason, I have a very difficult time conceptualizing the idea of billing a civil defense file–one that would normally be billed hourly–on a flat fee basis, even though it seems perfectly ok for a criminal file. This is so even though both files could unexpectedly settle or plea out or, alternatively, go to trial. So, both types of cases could end early on with minimal work or could result in many, many hours spent on pre-trial proceedings and on the trial itself.

But even though both cases have the same potential for a quick and early settlement or a lengthy representation, for some reason, I’m perfectly comfortable with the idea of estimating a flat fee up front for a criminal case, but not for a civil case. And the only explanation I can come up with for this apparent paradox is that that’s simply the way I’ve always done it. I have a certain comfort level with estimating costs for criminal cases, but not for civil cases. And I know from experience that in most criminal cases, in the end, it usually works out. But I can’t say the same for civil cases since I’ve never done it, hence my level of extreme discomfort when faced with the idea of value-based billing in a civil case.

I think that most lawyers are in the same boat as I am when it comes to value-based billing for matters that have always been billed hourly. You know it can probably be done, but it just doesn’t feel right. I do think, however, that this reluctance to embrace alternative billing will ease with the passage of time, and increasing client demands will accelerate this process.

For those of you ready to take the leap, Mark Robertson has some great advice in this recent article, “A Case for Alternative Billing,” from the ABA’s Law Practice Management Magazine. Mark suggests the following guidelines when setting a flat fee, and offers in depth explanations for each recommendation in the article: 1) know your costs; 2) data mine your files; and 3) determine the best-and worst-case scenarios.

And, law practice management guru Ed Poll provides further guidance for lawyers seeking to move to alternative billing in a recent ABA LPM section e-zine article “Technology Brings Billing and Receivables into the New World of Law.” Among other things, Ed explains why being open to the idea of transitioning to value-based billing is so important for solo and small firm practitioners:

Leveraging the efficiencies of technology will be a vital survival strategy for small practitioners in the “new normal” turmoil that law firms must deal with – but only if technology leverage is combined with innovative approaches to billing.  This point is crucial, because technology efficiencies without billing innovation will keep the firm from realizing technology’s financial benefit. In fact it could be the road to financial ruin if combined with a rigid billable hour approach, or with inefficiency in receivables policies.

Not everyone agrees with his conclusions, but he certainly makes a convincing case. So, even if you’re not quite ready to make the change to value-based billig, perhaps it’s time start thinking about alternative fee arrangements. Because it’s indisputable that the times they are a’changin’. It’s just a matter of how quickly and who’s going to be able to position themselves so that they can successfully pivot and make the changes work to their advantage.

–Niki Black

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